City and County of San Francisco Employees Retirement System RETIREMENT BOARD MEETING MINUTES

Transcription

1 City and County of San Francisco Employees Retirement System RETIREMENT BOARD MEETING MINUTES Wednesday, 1145 Market Street, 6 th Floor San Francisco, CA :00 p.m. MISSION STATEMENT San Francisco City and County Employees Retirement System is Dedicated to Securing, Protecting and Prudently Investing the Pension Trust Assets, Administering Mandated Benefit Programs, and Providing Promised Benefits. RETIREMENT BOARD MEMBERS President Brian Stansbury Vice President Wendy Paskin-Jordan Commissioners Leona Bridges Al Casciato Malia Cohen Joseph Driscoll Victor Makras Executive Director Jay Huish

2 Page 2 of 14 DISABILITY ACCESS The San Francisco Employees' Retirement System is wheelchair accessible. Accessible seating is available for persons with disabilities. To obtain a disability-related modification or accommodation, including large print agendas, American Sign Language interpreters, FM sound amplification system and auxiliary aids or services, please contact Norman Nickens at (415) at least two (2) business days before the meeting. There is accessible parking in the vicinity of 1145 Market Street at Civic Center Plaza. Accessible MUNI lines are available at the corner of Market Street and 8 th Street. The closest accessible MUNI /BART station is Civic Center Station. Materials accompanying the agenda are available for public inspection and copying at SFERS, 1145 Market Street, 7th Floor. For additional information, please contact Norman Nickens, Executive Assistant, at (415) In order to assist the City s efforts to accommodate persons with severe allergies, environmental illness, multiple chemical sensitivity or related disabilities, attendees at public meetings are reminded that other attendees may be sensitive to various chemical based products. Please help the City to accommodate these individuals. The ringing of and use of cell phones, pagers and similar sound-producing electronic devices are prohibited at this meeting. Please be advised that the Chair may order the removal from the meeting room of any person(s) responsible for the ringing or use of a cell phone, pager, or other similar sound-producing electronic devices. Know Your Rights Under the Sunshine Ordinance (Chapter 67 of the San Francisco Administrative Code) Government's duty is to serve the public, reaching its decisions in full view of the public. Commissions, boards, councils and other agencies of the City and County exist to conduct the people's business. This ordinance assures that deliberations are conducted before the people and that City operations are open to the people's review. FOR MORE INFORMATION ON YOUR RIGHTS UNDER THE SUNSHINE ORDINANCE OR TO REPORT A VIOLATION OF THE ORDINANCE, CONTACT THE SUNSHINE ORDINANCE TASK FORCE. Sunshine Ordinance Task Force City Hall 1 Dr Carlton B. Goodlett Place, Room 244 San Francisco, CA (415) by fax at (415) or by at sotf@sfgov.org Citizens interested in obtaining a free copy of the Sunshine Ordinance can request a copy from Mr. Darby or by printing Chapter 67 of the San Francisco Administrative Code on the Internet, Any materials distributed to the Retirement Board (or committee) within 72 hours of the meeting or after distribution of the agenda packet to Board (or committee) members are available for public inspection at SFERS, 1145 Market Street, 7 th Floor, during regular office hours. Lobbyist Registration and Reporting Requirements Individuals and entities that influence or attempt to influence local legislative or administrative action may be required by the San Francisco Lobbyist Ordinance (San Francisco Campaign and Governmental Conduct Code sections ) to register and report lobbying activity. For more information about the Lobbyist Ordinance, please contact the Ethics Commission at 25 Van Ness Avenue, Suite 220, San Francisco, CA 94103, telephone (415) , fax (415) and web site: Meetings are recorded by SFGovTV, the Government Channel 26. For DVD copies and rebroadcast scheduling call (415) Video on demand is available at:

3 Page 3 of 14 President Stansbury called the meeting to order at 2:40 PM. 1. Pledge of Allegiance OPENING CALENDAR 2. Roll Call Commissioner Malia Cohen Absent Commissioner Leona Bridges 2:40 PM Commissioner Al Casciato Excused Commissioner Joseph D. Driscoll 2:40 PM Commissioner Victor Makras Absent Commissioner Wendy Paskin-Jordan 2:40 PM Commissioner Brian Stansbury 2:40 PM President Stansbury called item # General Public Comment - Not earlier than 2:30 PM John Furlan, recommended a 15% allocation for Absolute Return in the asset allocation mix under consideration and the implementation within the tail-risk hedging feasibility study. He submitted the following statement: My two proposals are motivated by a recession/bear market in the next five years is the most likely of the investment scenarios in the NEPC Asset/Liability Study in which the Adjusted Mix allocation on page 26 recommended by NEPC is forecasted to result in a 42% funded status by 2022 on page 34. The first is that the Board adopt a 15% allocation to Absolute Return rather than 10% in the Adjusted Mix. Defensive hedge funds will outperform most other asset classes through the end of the next bear market, and your Managing Director can shift to more offensive ones after that. The second is that the CIO instruct his Director to conduct a feasibility study over the next 2-3 months on tail risk hedging SFERS 63% total equities. The PM 45%/AR 15% allocation on page 26 will not be sufficient to protect from the recession/bear market on page 34. David Page, Local 1021 retiree, expressed appreciation for the Board s previous actions regarding tobacco divestment and urged divestment from fossil fuels as well. There were no additional comments from the public and President Stansbury closed public comment. There were no comments from the public and President Stansbury closed public comment.

4 Page 4 of 14 President Stansbury called item # CLOSED SESSION The Board entered closed session at 2:51 PM. Recommendations and Possible Action on Sales and Purchases of Particular, Specific Pension Fund Investments under California Government Code Section (three investment recommendation). The following individuals were present for the closed session: Commissioners Bridges, Driscoll, Paskin- Jordan and Stansbury; Jay Huish, Executive Director; Caryn Bortnick, Deputy Executive Director; William J. Coaker, Chief Investment Officer; Art Wang, Managing Director for Private Markets; David Francl, Managing Director for Absolute Return; Tanya Kemp, Director; Han Pham, Vicki Owens, Senior Portfolio Managers; Justin Lo, Kien Trinh, Mark Coleman, Ashley Dennig, Dennis Esselsagoe, Joe Bates, Security Analysts; Robert Bryan, Molly Nordale, William Lin and Tran Ly, Deputy City Attorneys; Norm Nickens, Board Secretary; Anita Ng, Will Wise, Dwight Keysor and Scott Martin, Cambridge Associates; and, Allan Martin, NEPC. The Board returned to open session at 3:51 PM. Break 3:51 4:06 Action: Moved by Commissioner Bridges, Seconded by Commissioner Paskin-Jordan to not disclose discussions held in closed session under San Francisco Administrative Code Section 67.12(a). Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury President Stansbury called item # Action Item Acceptance of 2017 Asset/Liability Study and Approval of the Revised Asset Allocation Policy Documents provided to the Retirement Board prior to the current meeting: 2017 Asset/Liability Study and 2017 Liquidity Study prepared by NEPC William J. Coaker, Jr., Chief Investment Officer, Allan Martin, Partner, Phillip Nelson, Principal, NEPC (Board General Investment Consultant) presented an oral and written report on this item. Mr. Coaker reported that at the August 16, 2017 Investment Committee Meeting, Staff and NEPC reviewed the 2017Asset/Liability and Asset Allocation Study, with recommendations for changes to SFERS Asset Allocation. Mr. Martin and Mr. Nelson presented the 2017 Asset/Liability Study for the Board's consideration. The Study is substantially the same as the Study furnished to the Investment Committee last month. Also presented was a supplemental report, titled the Liquidity Study, which was furnished to the Board for additional information regarding NEPC's liquidity analysis of SFERS.

5 Page 5 of 14 John Furlan, noted the importance of the Asset Allocation Study process and urged the Board to support the efforts of staff to implement the policy, he also spoke in support of increasing the Absolute Return allocation. There were no additional comments from the public and President Stansbury closed public comment. Mr. Martin reported that the Board was being asked to approve asset targets are indicated in the recommended mix column in the NEPC report. A revised policy, including ranges and benchmarks will be presented at a subsequent meeting. He noted the challenges of setting asset targets given current market conditions, including low bond yields. He reviewed the recommended asset allocation mix. President Stansbury noted that NEPC had recommended a 10% allocation to Absolute Return. Mr. Nelson reviewed the Liquidity Study and Asset Allocation Study and reported that: The Plan is well funded on a market value basis, 83% as of July 1, 2016 Contributions are currently 21.4% of payroll for FYE 2017, 23.5% for FYE 2018, and are expected to increase for the next three years Current policy allocation is expected to produce an average return of 7.9% of the next 30 years - Exceeds the expected return on assets (EROA) of 7.5% - Due to current market headwinds, the 5-7 year return is expected to return 6.9% per year on average Capital markets backdrop continues to support a well-diversified, globally balanced approach - Current long-term asset allocation policy target is a well-diversified portfolio that strives for return without taking undue risk This allocation and liability analysis investigates important decisions for improving financial outcomes - Increase emerging markets and absolute return - Decreased public equity exposure - Decrease core bonds - Addition of dedicated private debt and Treasuries exposure The Plan's funded status is projected to increase in the next ten years The current Long-Term Target allocation is expected to meet the long-term expected return of 7.5% on a 30-year basis - NEPC expectations average 6.9% over the next 5-7 years and 7.9% over 30 years Beyond the next ten years, employer contributions as a percentage of payroll begin to trend downward - The plan's funding policy is to amortize changes in unfunded liability over 5-20 years - Past losses and COLA payments are being recognized over the next 4 years Proposed asset allocation changes to improve returns and improve risk-adjusted returns - Continue to build the private equity and real assets portfolios to improve returns

6 Page 6 of 14 - Adopt a private debt strategy and reduce core bonds to further improve returns - Increase absolute return to improve risk-adjusted returns Next Steps - Incorporate San Francisco City budget impact - Select Asset Targets - Approve Targets/Ranges/Benchmarks - Revise Investment Policy Commissioner Driscoll clarified that staff and consultant were proposing the recommended adjusted asset mix on page 26 of the NEPC report and expressed his appreciation to Staff and Consultant for the Liquidity Study. Commissioner Driscoll confirmed that ranges will be added to the recommended mix later and that Mr. Coaker agreed with the projected returns in the NEPC study. Mr. Coaker discussed the recommended mix in comparison to the optimal mix in the NEPC report. He noted that the Board may want to consider asset allocation every two years instead of the current practice of every three years. Commissioner Driscoll discussed managing risk and noted that it would be addressed separately from the asset allocation process. Commissioners Paskin-Jordan and Bridges noted that the recommended adjusted asset mix had previously been discussed in the Investment Committee meeting. Commissioner Stansbury discussed the risk of recession and the potential impact on the portfolio. He recommended consideration of the optimized mix in addition to the recommended adjusted asset mix. Mr. Coaker noted that staff and consultant considered underwriting and commitment pace as part of their recommended asset mix, and these would be an issue with the optimized mix. David Francl, Managing Director for Absolute Return, and Art Wang, Managing Director for Private Equity, were invited to address commitment pace for Absolute Return and Private Equity. Mr. Francl indicated that Absolute Return commitments could be made in a reasonable period, perhaps in as little as two years with the assistance of Blackstone. Mr. Coaker indicated that there were sufficient staff resources to prudently reach a 15% Absolute Return target within a few years. Mr. Wang noted that it would take time to reach the proposed Private Equity target, even with a wide enough range. Commissioner Stansbury spoke in support of the optimized mix to minimize the impact of any potential recession. Commissioner Driscoll noted that a market correction was likely, and the Board needs to consider tools for mitigation. He spoke in support of the optimized mix with an appropriate timeline for implementation, and recommended at least three years. Mr. Coaker noted that staff is comfortable with the mix recommendation, although they might modify the mix slightly (Private Equity at 18%, Private Debt at 10%, and Real Assets at 17%).

7 Page 7 of 14 Mr. Martin noted that NEPC is comfortable with the proposed mix. Commissioner Paskin-Jordan cautioned against moving too quickly. Mr. Wang noted that the proposed mix prioritizes private equity over real assets. Commissioner Bridges noted that the proposed mix was very aggressive, particularly regarding Absolute Return. President Stansbury called for additional public comment. Amihan Makayan, Local 21, spoke in support of a 10% allocation to Absolute Return and in opposition to a 15% allocation. Claire Zvanski, RECCSF, spoke against a 15% allocation to Absolute Return. Herbert Weiner, Local 1021 retiree, spoke against a 10% allocation to Absolute Return and recommended investment in good investments. Richard Hack spoke in support of defined benefits pension systems and in opposition to investment in hedge funds and privatization of public pension funds. There were no additional comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Stansbury, Seconded by Commissioner Paskin-Jordan to Accept the 2017 Asset/Liability Study and approve the Revised Asset Allocation Policy (Global Public Equity 31%, Private Equity 18%, Liquid Credit 3%, Private Debt 10%, Cash and Core Bonds 0%, Treasuries 6%, Real Assets 17%, Absolute Return 15%) Ayes: Driscoll, Paskin-Jordan, Stansbury Noes: Bridges President Stansbury called item #6 CONSENT CALENDAR All matters listed hereunder constitute a Consent Calendar, are considered to be routine by the Retirement Board and will be acted upon by a single vote of the Retirement Board. There will be no separate discussion of these items unless a member of the Retirement Board so requests, in which event the matter shall be removed from the Consent Calendar and considered as a separate item a Action Item Consent Calendar

8 Page 8 of b Action Item Voluntary Retirement Board List No c Action Item Decisions of Hearing Officers Peter Arnautoff Effective Date: 3/1/16 Imogene Jones Effective Date: 4/1/14 Kevin J. Lemon Effective Date: 2/1/16 Regina R. Mackey Effective Date: 4/1/16 H4 Inspector, Fire Dept. Fire 1428 Unit Clerk DPH-SFGH 7335 Sr. Stationary Engineer MTA 9163 Transit Operator MTA Industrial Disability Retirement Granted Ordinary Disability Retirement Granted Ordinary Disability Retirement Granted Ordinary Disability Retirement Granted d Action Item Travel Requests Request travel approval for Commissioner Wendy Paskin-Jordan to attend PRI in Person 2017, September 25-27, 2017, Berlin, Germany. Request travel approval for Commissioner Leona Bridges to attend the Private Equity Women Investor Network (PEWIN), October 3, 2017, Los Angeles, CA. Request travel approval for Commissioner Wendy Paskin-Jordan to attend Blackstone s 2017 BAAM Annual Investor Conference, October 19-20, 2017, New York, NY. Request travel approval for Commissioners Leona Bridges and Wendy Paskin-Jordan to attend the Women s Alternative Investment Summit, November 2-3, 2017, The Pierre, New York City. Request travel approval for Commissioner Joseph Driscoll to attend the Nossaman Annual Fiduciaries Forum, November 30 December 1, 2017, San Francisco, CA. Documents provided to the Retirement Board prior to the current meeting: Voluntary Retirement Board List, Hearing Officer Decisions, and Travel Requests. There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Paskin-Jordan, Seconded by Commissioner Stansbury to Approve Consent Calendar. Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury

9 Page 9 of 14 President Stansbury called item # Action Item Approval of Pension Adjustment to 66%: Vincent M. Milano (SFFD) Documents provided to the Retirement Board prior to the current meeting: Staff and City Attorney Memorandum Caryn Bortnick, Deputy Executive Director, presented an oral and written report on this item. There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Bridges, Seconded by Commissioner Paskin-Jordan to Approve Pension Adjustment to 66%: Vincent M. Milano Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury President Stansbury called item # Action Item Review and Acceptance of Supplemental COLA Analysis as of July 1, 2017 Documents provided to the Retirement Board prior to the current meeting: Staff and Cheiron Memoranda Janet Brazelton, Actuarial Services Coordinator, presented an oral and written report on this item. Ms. Brazelton reported that San Francisco Charter Section AB provides in part that supplemental cost of living benefits could be payable if "in the previous fiscal year, there were earnings in excess of the expected earnings on the actuarial value of the assets." In addition a Proposition C addendum to AB provides that "no supplemental cost of living benefit adjustment shall be payable unless the Retirement System was also fully funded based on the market value of the assets for the previous year." ln 2015, the State Appeals Court determined that the full funding requirement for payment of a supplemental cola was unconstitutional as applied to members who worked after November 6, 1996 and before Proposition C passed. These members are referenced as Post '96 Retirees. Although the Retirement Board determined that in light of this Court of Appeals conclusion, that the Proposition C addendum to AB should not apply to members who retired before November 6, 1996, the Superior Court has granted a preliminary injunction preventing the Board's decision from being implemented pending the resolution of litigation. The recent analysis by Cheiron demonstrates that there are excess earnings as defined by AB and provides that they are sufficient to provide the maximum increase under AB of three

10 Page 10 of 14 and one-half percent (3.5%) less the Basic COLA to the Post '96 Retirees. As the Retirement System is not fully funded, no supplemental COLA can be paid to post Proposition C retirees nor to members who retired before November 6, 1996 due to the preliminary injunction which is still in effect. Claire Zvanski, RECCSF, expressed her appreciation to the Board for the Supplemental COLA and urged the Board to remember the pre-1996 retirees who are excluded from receiving the COLA. Tony DiGiovanni, Protect Our Benefits, spoke in support of COLA payments to the pre-1996 retirees. Herbert Weiner, Local 1021 retiree, spoke in support of payments to pre-1996 retirees. There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Stansbury, Seconded by Commissioner Paskin-Jordan to Adopt Cheiron s Supplemental COLA Analysis as of July 1, 2017 and direct Retirement staff to calculate and process the Supplemental COLA payable effective July 1, Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury President Stansbury called item # Action Item Approval of the Minutes of the August 9, 2017 Retirement Board Meeting Documents provided to the Retirement Board prior to the current meeting: Draft Minutes of the August 9, 2017 Retirement Board Meeting There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Driscoll, Seconded by Commissioner Paskin-Jordan to Approve Minutes of the August 9, 2017 Retirement Board Meeting. Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury President Stansbury called items #11 and # Action Item Annual Report and Recommendation on Tobacco Divestment Documents provided to the Retirement Board prior to the current meeting: Report on Tobacco Divestment

11 Page 11 of 14 William J. Coaker, Jr., Chief Investment Officer; Han Pham, Senior Portfolio Manager, Vicki Owens, Senior Portfolio Manager; and, Allan Martin, NEPC (Board General Investment Consultant) presented an oral and written report on this item. At the May 26, 1998 meeting, the Retirement Board elected to divest holdings of domestic companies involved in the manufacture of Tobacco products. Staff provided an update on changes within the U.S. Tobacco industry over the past 12 months as well as details on the performance impact of not owning U.S. Tobacco companies in the SFERS' investment portfolio. Additionally, the report identified the list of restricted companies. Claire Zvanski, RECCSF, noted the number of oil related companies on the Sudan Divestment list. There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Driscoll, Seconded by Commissioner Paskin-Jordan to maintain current policy with respect to divestment and approve list of restricted companies for item #11 and #12 (Sudan and Tobacco) Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury Action Item Annual Report and Recommendation on Targeted Divestment in Sudan Documents provided to the Retirement Board prior to the current meeting: Report on Targeted Divestment in Sudan William J. Coaker, Jr., Chief Investment Officer; Han Pham, Senior Portfolio Manager, Vicki Owens, Senior Portfolio Manager; and, Allan Martin, NEPC (Board General Investment Consultant) presented an oral and written report on this item. In November 2006, the Retirement Board (the "Board") approved the implementation of Level Ill of SFERS' Social Investment Procedures with respect to divestment from Sudan. Each year, with assistance from Institutional Shareholder Services ("ISS"), investment staff ("Staff'") reviews the business activities of companies in Sudan and prepares a set of recommendations for the Board's review and consideration. One new company is being added to the list - Lanpec Technologies Ltd. (China). According to ISS, Lanpec Technologies installs petroleum and petrochemical equipment. Their main products include oil drilling machinery, oil refining, chemical, and offshore oil equipment. Staff sent letters to China Machinery Engineering Corporation (CMEC) and Petra Energy BHD and is waiting for a response. Staff would note that ISS lists both companies with activities in Sudan:

12 Page 12 of 14 China Machinery Engineering Corporation (CMEC) constructs thermal power plants, and hydro power plants. Also, it owns 58.4% of Lanpec Technologies, which installs petroleum and petro-chemical equipment. Petra Energy BHD is an investment company with core business activities in oil optimization, retrofits for oil wells, and design engineering. It supplies engineered equipment for the oil and gas industry. As of June 30, 2017, SFERS did not hold positions in any of these companies. There were no comments from the public and President Stansbury closed public comment. Action: Moved by Commissioner Driscoll, Seconded by Commissioner Paskin-Jordan to maintain current policy with respect to divestment and approve list of restricted companies for item #11 and #12 (Sudan and Tobacco)) Ayes: Bridges, Driscoll, Paskin-Jordan, Stansbury INVESTMENT CALENDAR Discussion Item Investment Committee Report Action: This was a discussion only item Discussion Item Report on Investment Performance for the Quarter Ended June 30, 2017 Action: This was a discussion only item Discussion Item Report on Managers Under Review Action: This was a discussion only item Action Item Approval of Semi-Finalists for Global and Non-U.S. Equity Managers

13 Page 13 of Action Item Chief Investment Officer Report DEFERRED COMPENSATION PLAN CALENDAR Discussion Item Review of SFDCP Investment Performance for the First Half of Discussion Item SFDCP Manager Report ADMINISTRATION CALENDAR Action Item Review and Approval of SFERS Strategic Plan Discussion Item Report on Committee Forward Calendars Discussion Item Personnel Committee Report Discussion Item Executive Director s Report Discussion Item Retirement Board Member Good of the Order Discussion Item Retirement Board Member Reports and Comments

14 Page 14 of Adjournment Having no further business, the Board adjourned the meeting at 5:54 PM. Respectfully submitted, Jay Huish, Executive Director